Practical completion practicalities

A contract administrator who gets practical completion wrong is dicing with danger

One of the key responsibilities of the contract administrator under a construction contract is usually to certify when the works are ‘practically complete’. Practical completion has important consequences for both the employer/client and the contractor – it normally stops the contractor’s liability for liquidated damages, triggers the release of a tranche of retention monies and allows the client to occupy the works. It may also trigger obligations or procedures in related contracts, such as a tenant’s liability for rent or ability to fit out the property. 

Given the financial consequences, a contract administrator who gets it wrong potentially faces significant liabilities. But what if the parties (and, perhaps most importantly, the client) want certification to be made in circumstances where the contract administrator does not consider this to be appropriate? There are a number of options to deal with this situation but each should be treated with caution.

Snagging lists. Such lists are common, whereby practical completion is certified subject to minor defects that are to be rectified afterwards. However, while they are standard practice, snagging lists are often not anticipated by the contract. This often does not cause any practical issues, but it is important to review the contract in each case.

Qualified certification. What about outstanding items that are more than mere snagging? Parties sometimes attempt to deal with this through conditional or qualified practical completion certificates.  Such an approach must be used carefully. It is important that a timescale is imposed on the contractor to rectify the defects in question quickly, and the consequences of any failure to meet the deadline should also be clear – in practice it is unlikely to be possible truly to ‘undo’ the certification and to reinstate the retention, the levying of liquidated damages and the insurance position. The client should also be advised that their commercial leverage will be reduced once the retention has been paid out.

Partial possession. One alternative to issuing a qualified certification is to employ the partial possession provisions in the contract (if any), although this will depend on the nature and extent of the outstanding works. If available, this option does have the benefit of using existing contractual provisions that specify what is to happen to the retention, liquidated damages, insurance etc in relation to the works which are and are not taken over.

Contract amendment. Where material defects or outstanding works exist (and rule out the option of partial possession), a bespoke agreement that supplements the building contract may be required.  This should clearly identify (a) what work is outstanding, (b) when it will be dealt with, and (c) where responsibility rests for the risk of and insurance for the areas where work is still to be carried out.   The impact on liquidated damages and retention release should also be covered.

Finally, when considering any of these options, contract administrators should also think about the potential consequences on security documents and third party agreements. For example, bonds tend to be drafted on the basis that they come to an end at practical completion (or shortly afterwards); will the client want this where there are still significant works outstanding? Alternatively, changes to contractual provisions may require the consent of guarantors, bondsmen or third parties such as tenants, purchasers or funders, and time should be allowed to obtain such consent.

Practical completion can be a risky area for contract administrators. It is possible for clients’ wishes to be accommodated but these must be implemented carefully and the right advice must be given in order for contract administrators to protect themselves against later criticism and potential liability.

Douglas Wass is partner at Macfarlanes


IN PLAIN ENGLISH

Defects are items of work which are not in accordance with the contractual requirements. They are often referred to as either patent or latent. Patent defects would usually be those which are apparent, or are discoverable on reasonable inspection. Latent defects are those that are not apparent or are hidden. A latent defect might later become a patent defect. Practical completion should not ordinarily be certified if there are patent defects.